Utilities, cool to Obama's clean energy standard, are redefining it

If President Obama's clean energy plan depends on the support of electric utilities, he has a lot of convincing to do.

Leery industry officials are maneuvering for leverage in the opening lap of Obama's push for a clean energy standard, a plan that one official described as "DOA" if Democrats fail to make major concessions.

The plan offers a complicated goal -- making cleaner fuels competitive with cheap coal -- but nearly no details. So utilities are floating their own, foreshadowing the kind of grinding negotiations that helped darken the nation's mood over climate legislation in the last Congress.

Some of the arguments, in fact, are reminiscent of those about cap and trade. Several officials with major utilities and trade associations warned of "wealth transfer" -- when companies in coal-heavy states would be forced to buy clean energy credits from utilities with ample hydropower or natural gas supplies.

"You'd create a huge regional problem," said an executive with a large utility. "States like Washington and Oregon and their utilities would be selling credits ... and there'd be what we call a rather large windfall for those states and a rather large deficit for other states."


Those credits -- if they exist under the developing plan -- would only be needed if a utility fails to meet the standard's minimum threshold for clean fuel. Utilities could also adapt to benefit, by selling credits that represent a surplus of clean power.

Wealth transfer is an argument streaked with warnings about big government mandates and higher electricity prices. It tainted the last climate debate as opponents used punchy attacks to describe the inequities of some regions.

Michael Morris, CEO of American Electric Power, one of the largest power providers in the nation and a major coal user, said then that one of the climate bills introduced last year would take money from "mom in the Midwest and dividend it to Paris Hilton."

The 'impossible' scenario

About 30 states derive at least half of their electricity from coal-fired power plants, the executive noted in an interview. From there, he added, it's a simple political calculation: A majority of lawmakers could see the clean energy standard as an economic anchor.

That's a past-fresh argument in some circles. The clean energy standard is seen by its supporters as a policy that overcomes regional fuel imbalances, because nearly every fuel type, except coal, helps companies reach the standard's threshold. The Midwest could benefit from its windy plains, the South from nuclear, and a growing number of states from natural gas, the use of which is forecast to double by 2035 to provide 40 percent of the nation's electricity.

But this is a policy of details. Large amounts of money could turn on a percentage point. And industry officials said they have more questions than answers. Yet the scope of Obama's goal -- deriving 80 percent of the nation's electricity from cleaner sources in 25 years -- struck them as bold, aggressive and challenging. At least one official interviewed isn't sure it can be done, even though the White House contends that utilities are already halfway to the 80 percent mark.

That number is an average that can be misleading, one industry official says. It might be accurate nationally, but when you drill down to smaller power companies, some deal in much lower amounts of clean electricity.

He expects the policy to unfold something like this. Early on, say by 2014, the standard might require utilities to increase their clean energy portfolio by 1 percent. Not so bad. But he's concerned by the administration's claim that 40 percent of the industry's fuel sources are currently clean. Was that a signal that utilities should be prepared to use that as a starting point?

"If they have to get 41 percent of their electricity from sources that are clean in 2014, for those folks who are right now pretty heavily coal-based, they're going to have to go from say 90 percent coal-based to ... 59 percent coal-based almost overnight," the official said, "which is impossible."

Reagan-era reactor to open next year

That's a scenario that supporters of the plan are trying to avoid. The Center for American Progress, a Democratic think tank, released its own template for a clean energy standard this week. It urges Congress to enact a program requiring that 35 percent of electricity be derived from renewable sources and efficiency, while 45 percent could come from nuclear, natural gas and carbon capture and sequestration.

The group was prepared for the utilities' concerns. It calls for "regionally differentiated targets," so coal-heavy states can meet the standard's requirements through cleaner fuels that are available to them.

Still, in the absence of details, utilities are generating their own. Some are pushing for a lower target than Obama's goal, or one with a longer timeline. Other ideas include bonus cash to encourage carbon capture technologies in coal plants, treating natural gas and renewable energy identically, and rewarding existing power plants, such as nuclear, as if they were new.

"Any standard should certainly give credit where credit is due," said Steve Lomax, senior manager for clean and renewable energy at the Tennessee Valley Authority. "It shouldn't penalize early action."

He's talking about TVA's three existing nuclear power plants, which generate about 30 percent of its electricity. Utility officials expect the standard's treatment of current plants, some of which were built decades ago and might provide little momentum for Obama's clean-tech push, to be a key negotiating point.

If the plants are not given credit in the system, it could reduce the role of nuclear power in the program. That's because few new facilities are expected to be built. The newest reactor in the United States was opened in 1996 by TVA, 23 years after construction began. It plans to complete another reactor next year at the same Tennessee plant, named Watts Bar. It's not a new project. Construction on the reactor was suspended in 1988 because of its cost relative to energy demand.

Cheap gas, expensive renewables?

Those economic assumptions could be rearranged by a clean energy standard. By Lomax's calculation, the president's goal to double cleaner fuels by 2035 necessitates a rapid ramping up of new power plants, on the order of about 16 facilities producing 1,000 megawatts each every year.

"That's doable, but it's aggressive," Lomax said.

But of all the complexities involved in designing the standard, natural gas might offer the trickiest piece. It's the cheapest fuel apart from coal, though its price can swing wildly. The use of gas, which is priced now at just over $4 per million British thermal units, is expected to double by 2035, fueling perhaps 40 percent of the nation's electricity as utilities phase out older coal plants. That's without a clean energy standard.

The White House has signaled its own concern with the prospects of accelerating the use of natural gas with a new standard. It has suggested assigning "partial credit" to "efficient natural gas" generation, meaning gas will be valued less than renewables and nuclear in helping utilities reach the minimum threshold for clean energy.

But that doesn't mean utilities will turn to wind and solar, said one of the utility executives.

"If you give it partial credit [for natural gas], you shouldn't be assuming that we're going to take renewables and up it to enormous percentages," he said, arguing that renewables will "reach a ceiling" of perhaps 20 percent of overall electricity generation, because of their intermittence and limitations with transmission.

Matt Watson, senior energy policy manager at the Environmental Defense Fund, agrees that gas, not renewables, could be the winner. The Energy Information Administration predicted in December that natural gas prices will rise to $7.19 by 2035.

"At those prices, natural gas displaces coal. It swamps nuclear and renewables, too, in a lot of cases, if not most cases," Watson said. "If you include natural gas in a clean energy standard, you probably end up with a policy that doesn't do much."

Endgame: End EPA climate rules

That's assuming the plan is enacted. The Senate, controlled by Democrats, will light the legislative path. It won't be easy to pass a standard. But the real fight will happen in the House -- if the policy ever makes it to the floor.

"It's not something that we're going to introduce. It's not something that we're going to bring up," a senior aide on the House Energy and Commerce Committee said of the clean energy standard, comparing it to the climate bill championed in 2009 by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.). "It's just another version of that."

That leads back to the administration's strongest negotiating tool: the prospect of suspending U.S. EPA's greenhouse gas regulations in exchange for a clean energy standard. That would be a jewel for the electric industry, but it would also strip Republicans of a potent campaign tool for 2012.

One utility executive, who expressed skepticism toward the president's clean energy plan, said an offer to pre-empt EPA's climate rules would put the clean energy standard in play.

"Absolutely," the official said. "You might have a chance."

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